Wells Fargo Upgrades Kate Spade (KATE) to Outperform

September 13, 2016 6:52 AM EDT
Get Alerts KATE Hot Sheet
Price: $17.20 --0%

Rating Summary:
    15 Buy, 6 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 1 | Down: 2 | New: 4
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Wells Fargo upgraded Kate Spade (NYSE: KATE) from Market Perform to Outperform and raising their valuation to $23-$24 from $16-$18. The analyst said 2nd-half acceleration potential creates a compelling risk/reward profile.

Analyst Ike Boruchow commented, "· Following a tough Q2 print (where comps missed and FY guidance was cut), KATE shares have underperformed our group (-10% vs. group +2%) as investor skepticism has increased and the stock has been put into the “penalty box” (KATE also down 30% vs. group -4% since late April). We feel that this has created a compelling entry point, especially considering that several drivers of their Q2 miss were execution (transition to Cameron, miss in novelty), while our QTD checks imply a pick-up in trends (improved product reception, increased flash sales). Our view on the LT margin opportunity also remains intact (20%+ EBITDA margins still appears achievable via sourcing, licensing and scale). Fact is, KATE has seen some recent choppiness in fundamentals over the past few months; however, 1) the brand is healthy (they continue to outperform peers and gain share), 2) top-line continues to outperform (we see 9-10% comps in 2H as reasonable), 3) margins should continue to move higher (12.5% EBIT margins remains 6-8 points below accessory peers) and 4) we believe valuation is extremely compelling here (just 7.0x EV/EBITDA on 2017 numbers – including benefit of NPV of $739 million NOL balance). All in, we see renewed top-line momentum entering 2H (see comp acceleration), with upside optionality for holiday (begin to lap tourism/outlet headwinds and see lion’s share of sourcing benefits in Q4) with a stock trading at a very attractive multiple (a 30% discount to the group despite KATE’s 25% bottom-line growth profile) - creating a favorable risk/reward setup from here. We are raising our valuation to $23-$24 from $16-$18 based on an EV/EBITDA valuation of 9.0x 2017E EBITDA."

For an analyst ratings summary and ratings history on Kate Spade click here. For more ratings news on Kate Spade click here.

Shares of Kate Spade closed at $18.38 yesterday.

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